Page 194 - JoFA_2022

TAX / PERSONAL FINANCIAL PLANNING

generally forfeited, although the Consolidated Ap- adoption assistance. Married couples generally must
propriations Act, 2021, P.L. 116-260, temporarily file a joint return to take the credit or exclusion.
allows employers to permit participants to roll over Unmarried couples are treated as one taxpayer for
unused amounts from 2020 to 2021 and from 2021 purposes of the credit; they may combine their
to 2022. For 2021, the DCFSA contribution limit qualified adoption expenses and allocate the credit
was temporarily increased to $10,500 for married between them however they choose (Sec. 23(i)).
couples filing jointly. For both the credit and the exclusion, qualified
Planning tip: Child care expenses paid with adoption expenses include reasonable and necessary
DCFSA funds are not eligible for the CDCC, so adoption fees, court costs and attorney fees, travel-
taxpayers must choose between the two tax benefits ing expenses, and other expenses directly related to
for the amount of expenses eligible for either ben- the legal adoption of an eligible child. An expense
efit (up to $3,000 after 2021). Pretax contributions may be qualified even if paid before an eligible
to a DCFSA will offer greater tax savings than the child is identified. Prospective adoptive parents may
CDCC if the DCFSA holder’s marginal tax rate therefore treat as qualifying expenses amounts paid
applicable to the pretax contribution is greater than at the outset of the adoption (items such as a home
the applicable CDCC percentage. Also, in cases study, video profile, or online marketing services).
where both spouses are afforded the opportunity to The rules governing the year in which an
fund a DCFSA, if one spouse earns more than the expense may be taken as a credit are different
FICA wage cap and the other does not, the couple for domestic and foreign adoptions. A domestic
can save FICA taxes by choosing to fund the lower- adoption is the adoption of an eligible child who is
earning spouse’s DCFSA. Regardless of which tax a citizen or resident of the United States or its pos-
benefit is most advantageous for the first $3,000 sessions before the adoption effort begins. A foreign
of eligible expenses, up to $2,000 of expenses in adoption is the adoption of an eligible child who is
excess of the $3,000 CDCC limit should be paid not yet a citizen or resident of the United States or
with DCFSA funds ($2,000 = $5,000 DCFSA its possessions before the adoption effort begins.
limit − $3,000 CDCC limit). This planning tip and For domestic adoptions, qualifying expenses paid
others are illustrated in hypothetical scenarios later before the year an adoption is finalized are allow-
in the article. able for the tax year following the year of payment
regardless of whether the adoption is ever finalized
Tax benefits specifically for adoptions or an eligible child is ever identified. For foreign
For adoptive parents, there are two additional tax adoptions, however, qualifying expenses paid before
subsidies: a credit for qualifying adoption expenses the year of the adoption are allowable only for the
and an income exclusion for employer-provided year when the adoption is finalized. In the case of

IN BRIEF

■ Tax professionals can includes tax benefits tax benefits have income- circumstances. Knowing
provide a valuable service available to parents based phaseouts that are where perilous marginal tax
to families that adopt a generally, such as the important to understand. rate increases exist can help
child by educating them child tax credit, as well ■ Through six cases, we show families that adopt a child
about adoption tax benefits as tax breaks specifically how the incremental tax avoid unintended economic
and strategies to maximize for adoptions, such as cost of an increase in family consequences.
them. the credit for qualified income, such as arises from ■ In addition to federal tax
■ For 2022, tax law provides adoption expenses and both spouses working benefits, 20 states offer tax
over $17,000 of potential the income exclusion outside the home, can vary benefits to subsidize the
tax savings to adoptive, for employer-provided dramatically depending cost of adoption.
working parents. This adoption assistance. These on the adoptive parents’

To comment on this article or to suggest an idea for another article, contact Dave Strausfeld at David.Strausfeld@aicpa-cima.com.

24 | Journal of Accountancy May 2022